Credit Suisse is delisting its popular oil trading products

Volunteer
William McConnaughey, 56, who drove from San Diego to help shovel
oil off the beach, stretches out his hands after carrying buckets
of oil from an oil slick along the coast of Refugio State Beach
in Goleta, California, United States, May 20, 2015. A pipeline
ruptured along the scenic California coastline on Tuesday,
spilling some 21,000 gallons (79,000 liters) of oil into the
ocean and on beaches before it could be secured, a U.S. Coast
Guard spokeswoman said. REUTERS/Lucy NicholsonREUTERS/Lucy
Nicholson

For most retail investors, buying physical crude oil as a
commodity is not an option. Instead, many investors turn to
exchange traded notes (ETNs) as a way to speculate on changes in
oil prices themselves.

But direct oil investment products like USO have always been
dicey as investment choices. More sophisticated investors with
big Wall Street banks who have high speed trading and information
advantages can essentially front run products like USO which
trade oil contracts on a predictable basis. As a result, USO has
been a far from perfect tool to replicate oil’s price movements.

By the same token, leveraged structured products including some
oil ETNs are an even worse choice. For evidence of that, one need
look no further than UWTI, the leveraged exchange traded note run
by Credit Suisse. Credit Suisse recently announced that it was
delisting UWTI and a similar but slightly smaller leveraged
ETN also focused on oil.

The problem with products like UWTI is not that the product
is unsuccessful, but rather that it is broken. UWTI was supposed
to give investors triple the daily exposure to a crude oil index.
That meant gains or losses from speculating on oil could be
substantially magnified by investors using the product. For that
reason, the daily dollar trading value of UWTI was roughly the
same as the dollar value of megacap Exxon Mobil’s daily trading
volume.

Similarly, UWTI has incredible liquidity – roughly half its
shares turned over on any given day. That was largely driven
by the fact that ETNs are not appropriate long term
investments because of the transactions costs they incur in
operations. Unfortunately for traders, those transactions
costs add up over time – that’s true in the case of UWTI and
virtually all other leveraged ETNs.

In the case of UWTI, this meant that the shares lost 99.6
percent of their value over the last four years even as oil
has only fallen by 50 percent. The only thing that stopped
UWTI from ending up as one of the cheapest of penny stock
investments is that the shares went through multiple reverse
splits. Investors in UWTI were virtually guaranteed to lose
money on the shares if they held them for even a short time,
especially when compared to the alternative of investing in
less costly alternatives offering exposure to oil.

Given the total failure of the product, it is little wonder
that Credit Suisse is delisting it. The bigger question for
investors is whether that shutdown will simply be followed by
a new similar product that will meet an identically
ignominious end in a few years. Based on the success of UWTI,
there is clear a market for such a product – a fact which is
an enduring testament to the poor decision making of some
investors. Investors often invest in these products as a tool
to capture a broad view about the direction of a commodity
failing to realize the flaws of the product.

Of course, there are many alternatives to physical oil as an
investment for those who see an increase in oil prices
coming. Oil stocks and ETFs of oil producers and servicers
like XOP are a great option. These investments are correlated
with oil prices, but don’t perfectly reflect changes in oil
prices. On the other hand, neither did UWTI which is why it
is going out of business.